Private thermal projects are staring at muted power demand, which is the effects of non-remunerative tariffs partly due to aggressive bids and some adverse perception due to falling renewable tariff, says India Ratings and Research (Ind-Ra). Ind-Ra believes that private developers are facing more challenges in operating thermal power projects than renewable energy projects.
In contrast, the large target by the government for renewable capacity addition and the focus on renewable purchase obligation along with falling tariffs in competitive bidding regime have led to an increase in demand for renewable energy. Strong counterparties for solar companies including Solar Energy Corporation of India and NTPC Limited ('IND AAA'/Stable) are providing comfort to developers on payment security. However, an improvement in the financial profile of distribution utilities is important for power projects to have stable revenue receipts.
For some states, particularly Uttar Pradesh and Bihar, which houses a significant proportion of population, the average per capita supply of electricity is lower than the national average. Also, a reliable and continuous supply is yet to be ensured in most states. Electricity demand is likely to grow across the country, driven by industrialisation. In FY16, 44% of electricity demand nationally was attributed to industrial demand, while around 23% was domestic demand (Source: Central Electricity Authority of India; CEA). Per capita supply was 1,075kWh in FY16.
In a falling electricity deficit scenario and excess energy tie-ups by distribution utilities, even amid high demand growth, projected generation capacity is well placed to meet the demand. In the scenario of electricity replacing diesel in applications including diesel generators, agricultural implements and railways, the additional electricity demand can be addressed by a 6 percentage point increase in the plant load factor of thermal plants. Ind-Ra in its estimates considers the amount of electricity that would have been required if all vehicles had become electric in FY17, to indicate the quantum of demand that can arise from the electrification of road transport.
Short-Term Power Trading Set to Rise: Ind-Ra believes that short-term power trading is set to rise, as the difference between the landed cost of power for industries from third party sources remains competitive to the tariff charged by distribution utilities. The transition will be aided by easing transmission congestion, transparency, thermal plants looking to sell untied power, discoms trying to sell excess power, and falling solar power cost.
Solar Manufacturers' Operating Margins Contract: Solar tariffs have fallen considerably, preceding even the pace of fall in solar panel prices. The pressure on price of solar panels is set to continue as there is a significant oversupply. The median gross margins were 8% and the median operating margin was negative 2% in 4Q16 for solar manufacturers which shipped about 30GW in 2016 (Source: National Renewable Energy Laboratory). The rise of new technologies in solar modules may also lead to a further price reduction.
Wind Projects Face Grid Curtailment Hurdle: Grid curtailment remains a major risk for wind projects, while the distribution utilities are trying to manage the grid with increasing intermittent power. Wind resource is a major affecting the viability of a project, as wake effect and climate events such as El Nino take a toll on generation.
Counterparty Profiles Display Inconsistency: Inter-state transmission assets continue to exhibit stable operating and receivable parameters, despite being exposed to weak counterparties. Counterparties' profile remains inconsistent as distribution utilities treat asset classes differently. Also, many distribution utilities have reported high payable days in their financial statements, while they pay within 90 days to independent power producers. Such anomalies lead to uncertainties in the assessment of counterparty behaviour.
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